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This article was originally published in July-August 1995 and was republished in July-August 2008 as an HBR Classic. This article includes a one-page preview that quickly summarizes the key ideas and provides an overview of how the concepts work in practice along with suggestions for further reading.

How do you create and sustain a profitable strategy? Many approaches have focused managers' attention inward, urging them to build a unique set of corporate resources and capabilities. In practice, however, identifying and developing core competence too often becomes a feel-good exercise that no one fails. Collis and Montgomery, of Harvard Business School, explain how a company's resources drive its performance in a dynamic competitive environment, and they offer a framework that moves strategic thinking forward in two ways. The resource-based view of the firm comprises a pragmatic and rigorous set of market tests to determine whether a company's resources are truly valuable enough to serve as the basis for strategy and integrates that market view with earlier insights about competition and industry structure. Where a company chooses to play will determine its profitability as much as its resources do. The authors spell out in clear managerial terms why some competitors are more profitable than others, how to put the idea of core competence into practice, and how to develop diversification strategies that make sense. To illustrate the power of resource-based strategies, the authors provide many examples of organizations-including Disney, Cooper, Sharp, and Newell-that have been able to use corporate resources to establish and maintain competitive advantage at the business-unit level and also to benefit from the attractiveness of the markets in which they compete.

learning objective:

To see how organizations can use corporate resources to establish and maintain competitive advantage at the business-unit level.

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In 1998, Newell Co., a manufacturer of low-tech, high-volume consumer goods, acquired Calphalon Corp., a high-end cookware company, and Rubbermaid, a $2 billion manufacturer of consumer and commercial plastic products. The case focuses on Newell's strategy and its elaboration throughout the organization, as well as the importance of selecting appropriate acquisitions to grow the company. Do Calphalon and Rubbermaid fit with the company's long-term strategy of growth through acquisition and superior service to volume customers? A rewritten version of an earlier case.

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This article presents a comprehensive framework for value creation in the multibusiness company. It addresses the most fundamental questions of corporate strategy: What businesses should a company be in? How should it coordinate activities across businesses? What role should the corporate office play? How should the corporation measure and control performance? Through detailed case studies of Tyco International, Sharp, the Newell Company, and Saatchi and Saatchi, co-authors David Collis (Yale School of Management) and Cynthia Montgomery (Harvard Business School) demonstrate that the answers to all those questions are driven largely by the nature of a company's special resources--its assets, skills, and capabilities. These range along a continuum from the highly specialized at one end to the very general at the other. A corporation's location on the continuum constrains the set of businesses it should compete in and limits its choices about the design of its organization. Applying the framework, the authors point out the common mistakes that result from misaligned corporate strategies. The company examples demonstrate that one size does not fit all. One can find great corporate strategies all along the continuum.

learning objective:

To see how a multibusiness company's assets, skills, and capabilities determine what businesses the firm should be in, how to coordinate activities across businesses, and how to measure performance.

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CARD (Center for Agricultural and Rural Development) is a Philippines-based microfinance organization that began as an NGO and has since expanded into eight related entities providing services to the poor. Under Founding Director Dr. Aristotle Alip's leadership, CARD has become one of the top microfinance institutions in the world. More recently, larger commercial and financial institutions are seeking a slice of the microfinance market. The main dilemma Dr. Alip faces is: Should he partner with commercial institutions to reap benefits from their larger sources of capital and technology expertise? Would that mean compromising his original mission of elevating people from the base of the pyramid?

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Case examines key strategic choices facing the head of a multi-business social enterprise in the Philippines.

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In recent decades an infusion of economics has lent the study of strategy much needed theory and empirical evidence. Strategy consultants, armed with frameworks and techniques, have stepped forward to help managers analyze their industries and position their companies for strategic advantage. Strategy has come to be seen as an analytical problem to be solved. But, says Montgomery, the Timken Professor of Business Administration at Harvard Business School, the benefits of this rigorous approach have attendant costs: Strategy has become a competitive game plan, separate from the company's larger sense of purpose. The CEO's unique role as arbiter and steward of strategy has been eclipsed. And an overemphasis on sustainable competitive advantage has obscured the importance of making strategy a dynamic tool for guiding the company's development over time. For any company, intelligent guidance requires a clear sense of purpose, of what makes the organization truly distinctive. Purpose, Montgomery says, serves as both a constraint on activity and a guide to behavior. Creativity and insight are key to forging a compelling organizational purpose; analysis alone will never suffice. As the CEO - properly a company's chief strategist - translates purpose into practice, he or she must remain open to the possibility that the purpose itself may need to change. Lou Gerstner did this in the 1990s, when he decided that IBM would evolve to focus on applying technology rather than on inventing it. So did Steve Jobs, when he rescued Apple from a poorly performing strategy and expanded the company into attractive new businesses. Watching over strategy day in and day out is the CEO's greatest opportunity to shape the firm as well as outwit the competition.

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Chen Feng and three others started Hainan Airlines in China during a historic transformation and privatization of the civil aviation industry. From a small loan from the local province in 1992, Chairman Chen built the company into a conglomerate that, by 2003, owned airlines, hotels, airports, travel agencies, an insurance company, and a department store. Despite its many successes, including being the first airline in China to attract foreign capital, the company faces many challenges at both the business and corporate levels. Was the company's increasing breadth a distraction to the airline business or a route to competitive advantage? Going forward, what should be Chen's priorities?

learning objective:

To discuss how to allocate scare resources among business units in the context of a historic countrywide privatization in China.

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Describes the transformation of a company's corporate-level strategy. Begins by laying out the strategy that brought the Newell Co. stunning success for nearly three decades. The highly integrated, internally consistent strategy was tailored for manufacturing and selling a particular genre of products to a particular kind of customer. In the mid-1990s, Newell encountered some shifts in its competitive environment and a subtle erosion in profits. In 1999, the $3.5 billion company paid a 49% premium to acquire the $2.5 billion Rubbermaid Co., in part for its product development process and strong consumer brands. After the acquisition, the profits of the combined enterprise deteriorated at an accelerated rate and the CEO was replaced. In less than a year, a fundamentally new strategy was announced, profits improved, and both Wall Street and major retailers were encouraged. Some setbacks followed, leading to reduced earnings and revised expectations. Exposes students to the pains and struggles of changing a deeply ingrained and long-lived strategy. Also forces them to confront the question of whether the new strategy is the right one and the markers one should seek to prove the case.

learning objective:

To illustrate the analytical and organizational challenges of transforming a long-lived, corporate-level strategy.

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This article includes a one-page preview that quickly summarizes the key ideas and provides an overview of how the concepts work in practice along with suggestions for further reading.

The causes of many corporate governance problems lie well below the surface--specifically, in critical relationships that are not structured to support the players involved. In other words, the very foundation of the system is flawed. And unless we correct the structural problems, surface changes are unlikely to have a lasting impact. When shareholders, management, and the board of directors work together as a system, they provide a powerful set of checks and balances. But the relationship between shareholders and directors is fraught with weaknesses, undermining the entire system's equilibrium. As the authors explain, the exchange of information between these two players is poor. The authors suggest several ways to improve the relationship between shareholders and directors: Increase board accountability by recording individual directors' votes on key corporate resolutions, separate the positions of chairman and CEO, reinvigorate shareholders, and give boards funding to pay for outside experts who can provide perspective on crucial issues.

learning objective:

To discover strategies for improving information exchange between board members and shareholders, so board members can make more informed decisions.

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